Amortization of intangibles under sections 167 and 197 - comments submitted Sept 29, 1997 by Tax Executives Institute to the IRS regarding Internal Revenue Code sections 167 and 197

Tax Executive, The, Nov-Dec, 1997

On September 29, 1997, Tax Executives Institute submitted the following comments to the Internal Revenue Service on proposed regulations under sections 167 and 197 of the Internal Revenue Code, relating to the amortization of certain intangible property. The Institute's comments were developed under the joint aegis of its Federal and International Tax Committees whose chairs are, respectively, David L. Klausman of Intel Corporation and Joseph S. Tann, Jr of Ameritech Corporation. The following TEI members also contributed to the development of the submission: David L. Bernard of Kimberly-Clark Corporation, Philip G. Cohen of Unilever United States Inc., and Judith E. Plump of Cosmair Inc.

The U.S. Department of the Treasury and the Internal Revenue Service have issued proposed regulations under sections 167 and 197 of the Internal Revenue Code, relating to the amortization of certain intangible property. The proposed regulations were published in the FEDERAL REGISTER on January 16. 1997 (62 Fed. Reg. 2336), and in the INTERNAL REVENUE BULLETIN on March 31, 1997 (1997-13 I.R.B. 12).(1) A public hearing was held on the regulations on May 15, 1997.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our 5,000 members represent nearly 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and that taxpayers can comply with in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under sections 167 and 197 of the Internal Revenue Code, relating to the amortization of certain intangible property.

Prop. Reg. [sections] 1.197-2: Amortization of Goodwill and Other Intangibles

Sections 167(f) and 197 of the Internal Revenue Code provide comprehensive rules for the depreciation and amortization of many intangible assets. Section 197(a) permits an amortization deduction with respect to the capitalized costs of a "section 197 intangible" that is acquired by the taxpayer and held in connection with the conduct of a trade or business or for the production of income. The amount of the deduction is determined by amortizing the adjusted basis of the intangible ratably over a 15-year period. Section 197(g) of the Code grants authority to the Secretary of the Treasury to prescribe appropriate regulations.

Section 197 was added to the Code by the Omnibus Budget Reconciliation Act of 1993 and affects taxpayers that acquired intangible property after August 10, 1993, or made a retroactive election to apply the 1993 law to intangibles acquired after July 25, 1991. A "section 197 intangible" -- which includes goodwill, going concern value, workforce in place, information base, know-how, customer-and supplier-based intangibles, governmental licenses and permits, covenants not to compete and other similar arrangements, franchises, trademarks, trade names, and contracts for the use of the foregoing assets -- is defined in Prop. Reg. [sections] 1.197-2(b).

TEI is concerned about the application of the regulations, especially in the international area. We believe that the proposed definition of section 197 intangible property is so broad that it reaches many ordinary, intercompany royalty payments that are deductible under section 162 of the Code, and that, we submit, Congress did not intend to affect by enacting section 197. The regulations should be clarified to ensure the continued deductibility of these items.

A. Application to License Agreements. Prop. Reg. [sections] 1.197-2(b)(11) defines a section 197 intangible as including "any right under a license, contract, or other arrangement providing for the use of' a section 197 intangible. Subparagraph (b)(5) further defines "know-how, etc." as including any "patent, copyright, formula, process, design, pattern, know-how, format, package design, computer software...or interest in film...." Under Prop. Reg. [sections] 1.197-24)(3)(i)(A), in the case of a license, permit, or contract for the use of a section 197 intangible, the amount chargeable to the capital account (and thus amortized over 15 years) includes

all amounts required to be paid

pursuant to the agreement or

right, whether or not

any amount would be deductible under

section 162 if the agreement or right